EU report card signals delay in ECB rate hikes

EU report card signals delay in ECB rate hikes

By Eamon Quinn

The EU in new forecasts has signalled a moderate pace of inflation across the eurozone in the next two years and projected glowing growth prospects for Ireland, raising the prospect for good news for Irish households and businesses that the ECB may once again delay raising interest rates, writes Eamon Quinn.

Alan McQuaid, chief economist at Merrion Capital, said the EU winter forecasts were “very positive” for Ireland, and may signal the ECB delays increasing rates to 2020. The commission said eurozone economic expansion will continue at a healthy clip.

For indebted Irish households, its key projections lay in its outlook for eurozone inflation.

That’s because the ECB will assess whether it will achieve its mandate to boost currently low-levels inflation to just below 2% through its huge bond-buying programme, also known as quantitative easing.

Financial markets expect the ECB to start raising interest rates around June next year, which would mean increased financial burdens for residential mortgage loans and business borrowers who are still among the most indebted in Europe after the financial crash.

After the eurozone posted an inflation rate of 1.5% last year, the commission projects prices will also rise 1.5% this year and by 1.6%, in 2019.

That would appear to mean that inflation will still fall far short of the ECB’s 2% mandate, in 2019, and make it harder for the ECB to taper its bond-buying programme and therefore push back the timing of its first rate increases.

In the winter forecasts, Marco Buti, the commission’s director of economic affairs, hinted at the dilemma facing the ECB.

“The ECB has indicated monetary accommodation will be required until the path of euro area inflation towards its definition of price stability is self- sustained.

Given the incomplete nature of the recovery, the broadly neutral aggregate fiscal stance for the euro area as a whole is appropriate for now,” he wrote.

“However, a proper differentiation across countries is crucial to ensure debt sustainability while supporting growth and employment,” said Mr Buti.

The commission’s outlook on Ireland is glowing.

It projects GDP last year to post growth of 7.3%, and forecasts expansion of 4.4% this year and 3.1% in 2019.

Increased spending by consumers and by building houses will help drive the economy, while more people in jobs will boost household finances over the next two years, it said.

Allowing for the distortions of the accounting practices of the multinationals, exports should rise in line with the growth in the world economy.

And it forecasts Irish inflation will stay well below eurozone average, as the effects on the surge in the value of the euro against sterling continue to bear down on prices.

It said that Ireland’s main economic challenges are in the potential overhaul of global and EU corporation tax regimes, and from Brexit.

“Risks to the economic outlook are still mainly linked to the outcome of the negotiations between the UK and the EU, and potential changes to the international taxation environment,” the commission said in its country-by-country review.

On the UK, the commission said that growth there will continue to slow markedly, to 1.3% this year and 1.1% in 2019.

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